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Commercial Update: 3 major questions for commercial teams


In this edition:

  • Keeping pace with change – 3 major questions for commercial teams.
  • AI is struggling to make inroads within corporate legal departments.
  • Is outsourcing in trouble?
  • California introduces its own GDPR.

Keeping pace with change – 3 major questions for commercial teams. McKinsey, the management consultants, highlight three core challenges:

  • Digital globalization: data and information now generate greater economic value than the global trade in goods. This creates two big questions for commercial teams – are we generating and using this new global currency of data and information; and do we have the commercial models and contractual vehicles to develop and sustain the right external relationships?
  • Automation: machines will steadily replace some jobs, augment others and make new ones possible. The impact on commercial roles – contract management, legal, procurement – will be massive. Are we planning for that future or will we let it overwhelm us?
  • Skill shift: McKinsey – and others – highlight the growing importance of technological, social and emotional skills. Examples are in areas such as relationship management, influencing, empathy and behavioral analysis. These are not currently critical attributes for the commercial community – so what steps are we taking to acquire them?

AI is struggling to make inroads within corporate legal departments. According to an HBR Consulting survey, just 6% have or are piloting AI tools – and many of those are in fact business tools to which Legal contributes. IACCM research suggests that the impact of AI on Legal is in fact more likely to come from outside the function, either through new enterprise applications or through external service providers.

Is outsourcing in trouble? The Economist (June 28th) quotes Serco CEO Rupert Soames who recently depicted the world of outsourcing as being a mix of ‘the good, the dumb and the desperate’. While there is no question that outsourcing drove major cost reductions and efficiency improvements in the past, those benefits may be drying up. In the public sector especially, questions are growing over future outsourcing. Public procurement policies that constrain supplier selection criteria and limit post-award innovation and change are driving a culture of low cost, with inevitable impact on quality and supplier integrity. The big question: is private sector experience actually very different; will we see an erosion of outsourcing, or does its future simply depend on developing improved commercial models and terms?

California introduces its own GDPR. Effective January 1st, 2020 the state of California will introduce its own version of GDPR, drawing on many of the same principles as the legislation introduced by the European Union in May this year. The new law aims to protect the privacy of consumers and has met with mixed reactions from industry. Already some – for example Microsoft – have indicated that they plan global compliance with GDPR. Others are more resistant – for example, just last week, Facebook moved 1.5 billion records from its European headquarters in Dublin.

The perverse effect of contracts


The choice of contracts – and particular terms and conditions – is often driven by habit, rather than any form of scientific thinking. That’s in part due to a lack of data, but ultimately responsibility for fixing the problem lies with those who create the contracts. Their failure to examine the impact of the agreements they develop means that the world of contracting is often rather like mediaeval medicine – either ineffective or, at worst case, far more likely to kill than to cure.

Growing sophistication in data collection and analysis is steadily revealing the nature and scale of damage done by poor contracting practices. One current example is the debate over the use of non-compete agreements. These have become pervasive and in many cases grossly unfair, seeking to prevent even low paid workers from moving to a competitive business.

The price of non-competes

There are of course circumstances where an employer genuinely needs to protect valuable know-how or intellectual property. But non-competes are a great example of applying contracts without thought for their social and economic impact – or even perhaps the interests of the employer. Inevitably, they limit worker mobility, which (research suggests) holds down wages. On the positive side for workers, studies undertaken in the US show that employers in states that allow non-compete agreements tend to spend more on staff training. However, by constraining mobility, those states lose out on innovation and the rate of new business start-ups – surely a big price to pay in today’s competitive markets and certainly not good for longer-term employment or profitability.

Non-compete agreements provide just one example of the way that contracts affect behavior, often with significant economic impact. From other research, we know that approaches to risk transfer, the management of intellectual property, the rigidity of terms and the use of inappropriate templates are among the many instances where there is a disconnect between the contract and a desirable outcome.

A better way

In many fields of human activity, there is extensive research and testing before new ideas or methods are let loose onto the public. Not so with contracts. Even though contracts are fundamental to human welfare, anyone can introduce new terms almost regardless of their social impact. While the law provides a framework that prevents major abuse, it does not examine broader questions of ethical or economic desirability – those areas rest with policy makers and, when it comes to contracts, their involvement is largely reactive.

Contracts and commercial terms are themselves a source of innovation and competitive edge. The idea that they could be subject to a regulatory regime is both unrealistic and undesirable. However, those who design and introduce them should certainly be responsible and accountable for the results that they generate and top management should be far more engaged in their review. This demands a much broader appreciation of the impact of contracts and greater professional discipline for those who produce them.

 

The BIG question for Procurement


More and more is written about the future of Procurement and the shift that is required in its approach. Collaborative, value-focused,  approachable – there is extensive commentary on the changes in behavior and attitude that are needed to engender trust and thereby raise functional status.

These observations are not new (I can recall similar discussions regarding value and status going back more than 20 years). Emerging technologies certainly make them more urgent, since a high proportion of procurement jobs are under threat. So the big question: why isn’t Procurement changing?

It’s easy – and tempting – to use excuses. Among the most common are the impact of the internal measurements (negotiated savings and compliance) imposed from above, or the untrustworthy behavior of suppliers which prevents collaboration. But the truth is that these issues won’t go away unless procurement personnel make them go away. They have power over their own destiny.

We will squeeze them until the pips squeak

Behaviors are embedded. It takes leadership and determination to make them change. I’m told that much Procurement training still perpetuates the adversarial, them-and-us attitudes that undermine a shift in status. Often, those who should be setting an example fail to do so. For example, at a recent meeting, a leading advocate of collaborative working felt the need to explain that ‘Collaboration doesn’t mean weakness – we’ll squeeze suppliers until the pips squeak’.

And suppliers confirm that, in general, Procurement attitudes aren’t changing. There’s lots of talk about value, about delivering outcomes and working together, but for many the reality is a process-driven approach with little evidence of shared responsibility for performance.

Beacons of hope

There are beacons of hope. Tesco, a large UK retailer, has recently been cited for its progress in shifting from a highly adversarial approach to one of increased fairness and respect for its suppliers. General Motors is another example where supplier ratings have improved dramatically in recent times, reflecting a move away from its power-based approach towards the supply base. In Australia, CASG (the procurement arm of the Department of Defence) is a true leader in developing its contracting and relationship management expertise and Jemena, a power utility, is also at the forefront of change.

We see an increasing number of individuals and groups that are opening their minds to different training and certification providers, recognizing the need to break from ‘old school’ thinking. At IACCM, we continue to experience growth in the number who realise not only that suppliers are not the enemy (there is actually interdependence), but also that shared learning, shared methods, shared terminology offer the best route to mutual understanding and respect. These groups also appreciate the critical importance of gaining broader commercial skills, rather than an exclusive focus on procurement and logistics.

It is perhaps the issue of respect that is key to change. By working together, customers and suppliers can achieve great things. To flourish, Procurement personnel must become the instigators of change. It’s a choice –  and truly does represent the BIG question.

IACCM will be running a series of programs on the BIG question, Procurement and change. Watch out for webinars where we will feature those who are successfully transforming and this will culminate in  workshops and discussions at the IACCM Americas conference, ‘Collaborating Across Boundaries’, in October. (visit http://www.iaccm.com/Americas)

 

 

 

Most negotiated terms 2018


If the reason for negotiation is to reach an agreement that delivers mutual benefit, it is quite clear that many of today’s business-to-business negotiations fail to achieve their purpose.

IACCM has released this year’s report of the most negotiated terms, providing insight from more than 2,100 organizations. Participants confirm the steady shift of business towards services, reflected in substantial growth of outcome, performance and solutions contracts.

This movement is evident in the terms that negotiators consider most important:

  1. Scope and Goals / Specification
  2. Responsibilities of the parties
  3. Price / Charge / Price Changes
  4. Delivery / Acceptance
  5. Service Levels
  6. Performance / Guarantees / Undertakings
  7. Limitation of Liability
  8. Payment
  9. Data Protection / Security / Cybersecurity
  10. Change Management

However, this understanding of importance does not translate to a shift in the terms that are most negotiated, which remain dominated by issues around risk allocation and the consequence of failure. Limits of liability, Indemnities, Termination and Warranties occupy four of the top six positions.

There is some diversity in the most negotiated topics based on legal system and industry – for example, battles over risk transfer are noticeably greater in Common Law jurisdictions, whereas countries operating under Islamic Law tend to be far more focused on financial issues and Civil Law regimes appear more concerned about clarity of responsibilities and intent. The research therefore illustrates the importance of negotiators understanding the issues that drive particular industries or cultures and taking these into account as they draft and negotiate agreements.

Is there room for optimism?

The results do not point to any dramatic shift in the traditional priorities for negotiators and indicate that many interactions remain power-based, rather than seekiing mutual benefit. Participants continue to see ‘the other side’ as the main obstacle to change and show limited signs of seeking to alter the conversation.

However, IACCM knows from its work with members that change is happening. New technologies are a major (though not the only) factor in enabling a different approach, streamlining dataflows, supporting analytics and simplifying communication. Automation has the benefit of lacking emotion and takes issues of trust and tradition out of the equation. There is a growing divide between those organizations which are making technology investments and those that are not. Quite simply, without automation, a supplier becomes difficult to do business with.

In this year’s report, IACCM highlights four steps that organizations should take to shift the negotiation agenda and enable focus on value and benefits. These are:

  1. Focus negotiations on the terms that are costing money. Supporting this direction, the report publishes a list of the terms most commonly associated with a claim or dispute and suggests this data can be used to support a change of focus.
  2. Ensure use of the right agreement by implementing ‘decision trees’. Remarkably, work with IACCM members has shown that far too many agreements are based on an inappropriate contract template, which not only delays the process, but also represents a source of risk.
  3. Reduce repetitive negotiation by adopting the IACCM Principles. These Principles, which are freely available, have been developed by lawyers representing a group of leading international corporations with the specific purpose of enabling less time on the terms linked to failure and more on those which would support success.
  4. Improve implementation and understanding by automating extraction and dissemination of terms. More and more organizations are grasping the importance of structuring and drafting agreements as communication tools, whether or not this is accompanied by automation.

Perhaps the most important message is that change is starting to happen; the agenda is shifting and the pace shows clear signs of acceleratiing. So the key message is: Stop listenting to people who say that change isn’t possible – don’t get left behind.

This year’s report on the Most Negotiated Terms can be accessed on the IACCM website

 

Public sector contracting: failing the public interest


The Premier of New South Wales is just the latest politician to espouse the cause of collaboration. Faced by high-profile lawsuits and massive cost overruns, Gladys Berejiklian this week pledged ‘to take a different approach to big infrastructure projects’.

IACCM’s unique multi-jurisdictional research has confirmed that, all around the world, business and governments are suffering from strained relationships, poor results, reputational damage, an erosion of public trust. Yet they continue to engage in adversarial procurement methods, driven by outdated policies that focus on the lowest price and a distorted view of competitive markets. The public sector deludes itself that these approaches are somehow in the public interest, despite all evidence to the contrary. How many times do we have to deal with delays, cost overruns, sub-standard service delivery and suppliers driven out of business? Why aren’t we instead measuring public procurement’s contribution to economic value, social benefit, wealth creation and ethical impact?

The answer is in large part because politicians and senior government officials have no understanding of the impact of today’s procurement policies; and their private sector counter-parts, while calling for change, mostly do so without any specificity around what that change should be. Indeed, the sad truth is that those private sector leaders are in fact using many of the same procurement approaches – or worse – within their own business.

Change is not beyond our grasp

Changing this is not simple, but it is quite clear what needs to be done. First and foremost, the traditional thinking of policy makers and their enforcers in finance, law departments and procurement must be challenged. We are using outdated theories to manage trading relationships that are now dynamic and highly interdependent. Ignorance is not a good excuse.

A story in today’s Financial Times is a wonderful illustration of the problem and the possibilities. It relates to the global market for vanilla, a commodity currently in short supply and therefore subject to a price boom. A few far-sighted corporate leaders have grasped the point that current supply chain management theories are counter-productive from both an economic and social perspective. Procurement practises such as ‘commoditization’ and ‘aggregation’ pay no attention to anything beyond maximizing short-term bargaining power and minimizing input cost. The idea of truly understanding and collaborating with the supply base is alien to this way of thinking. These leaders are instead focusing on better understanding ways to develop sustainable markets and to protect supply by protecting suppliers.

To do this, they have recognized the need to explore the entire supply network and ensure the elimination of those intermediaries who bring no value and are simply exploiting producers. The result is overall lower cost, but for the producers themselves a much higher level of return and security. Contracts in this environment are not about lowest price, enforced renegotiation and arbitrary termination rights; they are instead about developing an ethical and sustainable market which delivers economic benefit to all participants.

Generating a new approach

What would this mean if it were extended to public procurement? First, it would force a rethink of policy in areas such as market engagement and selection criteria. Second, it would bring an end to the nonsense of risk transfer and the myth that the public sector cannot accept risk. Third, it would eliminate lowest price selection methods and instead require the exploration and understanding of value – both short and longer term. Fourth, there would be a true focus on the role of procurement practises in delivering on ethics and social value. And finally, there would be new contracting models and training to implement these collaborative values.

Politicians and public servants should be at the forefront of driving change in trading policies and practises. It is encouraging that several are now working with IACCM to undertake reform, but this is a small minority. For others, it is time to move beyond platitudes and statements of intent. The public interest demands new approaches to the formation and management of contracts so that they consistently deliver against social needs and ensure public procurement truly does operate in the public interest.

 

The Dark Side


There is so much buzz around the need for stronger relationships, the importance of collaboration, the value to be achieved through partnering.  Business today demands personnel who deliver these qualities and who welcome diversity, the use of judgment, the eradication of prejudice.

So why is it that a major professional association would allow its publications to refer to Sales as ‘the dark side’?  Continuing to encourage procurement professionals to perceive suppliers as ‘the evil enemy’ undermines everything that our society is trying to achieve.  It assumes innate opportunism, dishonesty, lack of moral concern – and in so doing, mimics the precise behaviours it claims to despise.  Further, it demonstrates a fundamental ignorance of business and economics – in the commercial world, procurement jobs exist only because of successful sales people.

In the public sector, far too many failed programs and wasted opportunities can be at least in part traced back to these confrontational techniques by procurement staff.  They lead to a culture where suppliers are dismissed as readily replaceable and the buyer denies responsibility for outcomes.  In these situations – sadly still too common – low price and risk transfer is the mantra of success.

Value destruction is a choice

Any function or group that creates barriers of this sort destroys the potential for achieving value. Today, the levels of interdependency between organizations are greater than ever.  This ‘old school’ procurement is outdated and – quite honestly – unacceptable. It is also fast becoming irrelevant.

Looking at the amazing growth of an organization like IACCM, it owes its success to its inclusiveness and the fact that it focuses on shared integrity, not adversarial compliance.  Yes, members challenge each other, but that is healthy and contributes to self-realization. Every professional or specialist group benefits from a dose of reality.  But they benefit even more when they work together, operating to shared standards and in an environment of respect.  That’s what happens when they undertake IACCM training, participate in research or attend IACCM events.

Our world is one of enlightenment. Let’s eradicate the dark side!

Contract negotiations and ineffective risk sharing


I’m in Australia, reading the Financial Review. An article on infrastructure projects asks the question: ‘Will this investment surge allow Australia to ride the global economic upswing? Or. amid the rush to compete, are high profile commercial disputes a sign that government and business are failing to effectively share risks for taxpayers and investors?’

A great question – and one that I am encountering everywhere I go. During the weekend, it was the subject of an online discussion with a leading academic in Denmark. Last week it was with the CEO and General Counsel of a major European outsourcing provider. The week before, it was a conversation with the Canadian government …. the list goes on, but ultimately it all comes down to the point that contracts and negotiations are overwhelmingly focused on the wrong thing.

Most negotiated versus most disputed terms

This week will see the release of IACCM’s latest annual report on ‘the most negotiated terms’. Once again (and this is the eighteenth year of reporting), it reveals that contention over risk allocation dominates the typical agenda. Contracting remains primarily driven by issues of relative power and theoretical protection of assets through the application or avoidance of onerous terms. Hence – other than price or charge – the top negotiated terms remain focused on liabilities, indemnities, intellectual property, termination rights and warranties. The only encouraging news is that scope and goals has crept into fifth place.

Why is this a cause for concern? Quite simply because these terms are in general not relevant to achieving business goals and, in fact, success in risk transfer increases the likelihood of a failed outcome.

Right diagnosis, wrong remedy

The world is volatile. It is not possible to accurately predict market and competitive conditions a few weeks from now, let alone several years ahead. This uncertainty lies at the heart of risk and business people are absolutely right in wanting to establish mechanisms that protect against those risks. Today’s business requirements or social imperatives may look very different in the future. So contracts quite naturally become a vehicle through which the parties seek to limit their exposure to possible harm. The problem is that they are going about this the wrong way – they are seeking to protect themselves at the expense of the other party, rather than working together to develop shared protection. They create contracts that are prescriptive, rather than adaptive.

Ultimately, using power to impose or resist terms and conditions leads to adversarialism. Perhaps more important, it means that contracting parties fail to deal with the issue of uncertainty. It often starts with the very things that they believe are certain – their core goals and objectives. Economics guru Professor Richard Thaler has written about this in the context of behavioral economics and the fact that people frequently think they have agreed, but actually have a very different understanding of what they have committed to do. This is one reason why the number one cause of contract dispute is disagreement over the price or charge, tightly linked to issues around scope and goals. According to Professor Thaler, a remedy for this is to have everyone document what they think has been agreed – and then make sure they deal with the differences.

The remedy for improved success is to spend time establishing and formally agreeing the mechanisms for handling uncertainty and avoiding confrontation, of which one element is having clear and understandable documentation. There will be disagreements; there will be performance shortfalls and errors; there will be times when one or both parties need to compromise. If resolving these situations is left to chance, they will frequently lead to problems. If, on the other hand, the parties have established and implemented effective methods for early identification and resolution, they will typically arrive at a successful outcome.

This isn’t just a theory

IACCM has been promoting new and better ways of contracting and negotiation for many years. Since 2011, this has been through encouraging what we term ‘relational contracting’. This well-defined approach brings increased discipline to the way that contracting parties interact. It stops leaving ‘a good relationship’ to luck and actually institutes formality into the way they will handle their day to day interactions, especially around unexpected or unanticipated events.

The important point is that it works. We have implemented this approach in a variety of major project and services agreements, both public and private sector. They come in on time, on budget and with a workforce that is energized and motivated by positive results and positive relationships. Success like this becomes self-reinforcing.

Major projects and large outsourcing relationships require similar thinking to managing and structuring a large organization. People need clarity over the processes they will use, the ways they should communicate, the shared goals and objectives they are pursuing. Imagine if the functions within an enterprise tried to operate using only an incomprehensible legal document that focused on the consequences they would face when they failed. Motivating? Productive? Clearly not.

The new edition of The Most Negotiated Terms sets out a series of steps that would embed a new approach to trading relationships. But already, through the adoption of relational contracting principles, organizations could be making a dramatic shift in contract success. It’s just a question of whether we are ready to address the question posed by the Financial Review – are we willing to start sharing risks so that we can also share benefits, or are we just too invested in fighting over whose losses will be greater?